Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Directorate of -Sftret- Intelligence Japanese Overseas Direct Investments: Recent Trends and Future Prospects ec EA 83-10112 June 1983 Copy 2 8 8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 11lrcuturatte U1 Secret Y- No! Japanese Overseas Direct Investments: Recent Trends and Future Prospects 25X1 This paper was prepared by ffice of East Asian Analysis. It was coordinated with the National Intelligence Council Comments and queries are welcome and may be directed to the Chief, Japan Branch, OEA, on Secret EA 83-10112 June 1983 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Japanese Overseas Direct Investments: Recent Trends and Future Prospects Key Judgments Japan moved rapidly in the 1970s to increase investments in foreign Information available countries in response to strong protectionist pressures from abroad and as of 13 June 1983 shifting market competitiveness at home. We believe that this move will was used in this report. ease some of Japan's current trade problems. Japan now accounts for more than 5 percent of the world's total overseas direct investment, a figure that will rise to 10 percent by 1990 if the current trend continues. Japanese firms overseas employ about 700,000 people. We expect that number will more than double by 1990 as Japanese businesses continue to ship out capital because of limited investment opportunities at home, high demand for Japanese products overseas, and protectionist measures against Japa- nese exports Japanese investment is moving away from the earlier emphasis on resource exploitation and is focusing more on manufacturing industries. Simulta- neously, the geographical emphasis has shifted to the United States and Western Europe and away from developing countries. A select number of stable LDCs, such as the ASEAN countries, however, will continue to receive a significant share of manufacturing investments. The Japanese Government offers a variety of incentives and special programs to help firms, including small businesses, invest offshore, such as risk insurance, modest tax breaks, counseling, and information services. Government financial institutions provide only a small amount of the cash needed to finance overseas operations but are able to aim their limited funds at selected countries or particular investment sectors. In the 1970s, for example, Tokyo encouraged resource development investments to ensure access to raw materials. The government has shifted its emphasis toward manufacturing investments in advanced countries such as the United States and in Western Europe, where trade frictions are growing and has made Export-Import Bank funds available for this purpose. Despite Tokyo's endorsement of capital exports, Japanese industry and labor are beginning to worry about the long-range effect that rapid expansion of production facilities abroad will have on domestic employ- ment. iii Secret EA 83-10112 June 1983 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 The United States will benefit most from current trends. We estimate that for every $1 billion in new investment at least 5,000 new jobs would be cre- ated in the United States. In the next few years, the capital-intensive transportation industry should lead the list of Japanese investments, as automobile firms attempt to overcome trade barriers and parts suppliers move to service the growing fleet of Japanese cars in the United States. In terms of the number of investments, the electronics industry and other firms manufacturing high-technology products should play a larger role as companies continue to open or expand local production facilities and seek links with US firms. Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84S00553R000200170002-8 Corporate Strategies . Manufacturing Investments in Western Europe 8 ASEAN: Changing Pattern of Japanese Investments 8 Conclusions and Prognosis 12 1. Japan: Cumulative Overseas Investment by Region-FY 1951-81 2 3. Japan: Overseas Investment in Manufacturing and Resource Development 1. Japan: Overseas Investment Through March 1982 by Region and Industry 3 3. Japan: Direct Investment in the United States 4. Japan: Investment in the Manufacturing Sector of ASEAN Countries Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84S00553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Japanese Overseas Direct Investments: Recent Trends and Future Prospects The cumulative total of Japan's direct overseas invest- ments from 1951 to the end of Japan's FY 1982 reached $53.1 billion, according to the Ministry of Finance.' Japan is fourth after the United States, Great Britain, and West Germany in the world and accounts for roughly 5.3 percent of direct investments worldwide. The small size of Japan's share reflects its late start-almost all of Japanese outlays have oc- curred since 1969 when Tokyo began easing restric- tions on investments. Japanese companies now operate in 120 countries and have more than 7,000 affiliates. Japanese subsidiaries overseas employ over 700,000 local workers, more than 80 percent of whom are in manufacturing industries. About 60 percent of the workers are employed in affiliates in Asia, mostly in textile and electrical equipment plants; over 11 per- cent are in manufacturing plants in advanced coun- tries. Japanese firms have invested overseas in order to offset limited expansion opportunities or higher costs at home and to gain access to new sources of raw materials and new markets. Overseas investments, as a result, went from nearly zero in the late 1960s to $10.3 billion by early 1974 and accelerated even more rapidly after the mid-decade recession ' Japan's fiscal year begins on 1 April of the stated year. The $53.1 billion represents direct investment approvals and not book values of existing overseas investments. Ministry of Finance data on Japan's direct investments overseas are compiled per fiscal year on the basis of licenses granted or reports received. Official tabulations do not show the exact amount of the actual investment, withdraw- als, or reinvestments of earnings. Such official statistics are inflated from the book value of investments abroad. The Bank of Japan compiles investment figures on the basis of balance of payments. These statistics do not show reinvested earnings, nor are they broken down by type of industry or region. Whereas the Finance Ministry reports an aggregate of $45.5 billion in overseas direct investments as the end of fiscal year 1981, for example, the Bank of Japan records $24.5 billion, about half that amount, as the cumulative total at the beginning of calendar year 1982. For this paper we use the Ministry of Finance listings, unless otherwise noted. This study is based largely on official Japanese sources The investments that dominated the early 1970s were: ? Raw material development projects in resource-rich countries. ? Assembly plants for labor-intensive products, main- ly in Southeast Asian countries. ? Commercial and financial offices in industrialized Between 1972 and 1977 Japan's direct investments overseas were almost evenly divided among commerce and service industries (37 percent), manufacturing industries (35.1 percent), and resource development industries (28.3 percent). In the next two years, how- ever, manufacturing and commerce and service indus- tries accounted for nearly 85 percent of new outlays as Japanese firms moved to offset the impact of fluctuat- ing exchange rates and trade barriers. Geographical- ly, this was reflected in a shift toward the United States and other industrial countries and away from Latin America and other developing regions (see figure 1). Asia, nonetheless, continued to receive a large proportion of investments each year, reflecting its position as both a major market and a source of raw material and cheap labor. In examining the Japanese investment data, it is clear that there is a link between investments in the manufacturing and commerce and service sectors. Japan's service and trade investments in a number of countries established a marketing network for exports as well as a working relationship with local financial institutions. Such a network often served as a forerun- ner for manufacturing investments, which moved in later. Afterservice investments for manufactured products are also part of this process. Such a pattern can be seen in the consumer electrical appliance and automotive industries, for example. By the late 1970s changes were also occurring within the manufacturing sector: ? Investments in labor-intensive industries peaked by 1974 and then waned, largely as a result of in- creased labor costs in developing countries. Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Figure 1 Japan: Cumulative Overseas Investment by Region-FY 1951-81 North America us Canada Asia Indonesia Hong Kong Singapore South Korea Other Latin America Brazil Panama Mexico Other Europe UK West Germany Other Africa Liberia Other Middle East Saudi Arabia/ Kuwait Other Oceania Australia Other ? Investments in such basic capital-intensive indus- tries as chemicals and metals increased rapidly with the escalation of costs of energy and raw material imports, competition from newly industrializing countries, and concern over pollution in Japan. ? By the end of the decade, investments in the machinery industries, particularly the electric ma- chinery and automobile assembly industries, were rising noticeably In FY 1981 new capital investments reached a record $8.9 billion, 90 percent above the FY 1980 level. This surge was marked by significant increases in manu- facturing ventures in advanced countries, particularly in the electrical, machinery, and automotive indus- tries, and the completion of several large-scale proj- ects in stable LDCs, such as the development of liquefied natural gas (LNG) in Indonesia. According to recently released Ministry of Finance compilations for FY 1982, Japan's direct private investments abroad slowed to $7.7 billion, less than the increase in FY 1981 but a significant improve- ment over the annual figures for the 1970s' earlier performances (see figure 2). Japanese enterprises stepped up direct investments in industrialized nations while reducing investments in developing nations. New investments in Asia dropped almost 60 percent; in contrast, North America increased 15 percent and Western Europe 10 percent: ? There were no large-scale investments, such as the $1.8 billion LNG project in Indonesia in 1981. ? Yen depreciation of about 10 percent in FY 1982 undoubtedly dampened some investor interest in overseas ventures. ? The general slowdown of the world economy, a deepening domestic recession, and corporate wari- ness of investing in a growing number of economi- cally or politically unstable developing countries were also factors. Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Secret Table 1 Japan: Overseas Investment Through March 1982 by Region and Industry North America Latin America Asia- Pacific Europe Africa Middle East Total Manufacturing 3,409 3,034 6,120 1,042 154 1,093 14,852 Foodstuffs 312 150 214 44 8 0 728 Textiles 207 361 967 151 38 4 1,728 Timber and pulp 368 189 266 0 0 0 823 Chemicals 283 507 957 119 16 972 2,854 Iron and steel, nonferrous metals 395 825 1,630 164 75 52 3,141 Machinery 342 275 341 132 0 10 1,100 Electrical machinery 992 251 621 173 5 12 2,054 Transportation equipment 339 379 536 97 6 4 1,361 171 97 588 162 6 39 1,063 8,886 4,317 9,998 4,226 1,863 1,260 30,550 229 150 297 0 7 2 685 Fisheries 81 78 120 2 54 1 336 Mining 693 1,223 6,277 859 516 39 9,607 Construction 156 142 119 31 19 24 491 Commerce 4,052 537 865 1,115 3 11 6,583 3,675 2,187 2,320 2,219 1,264 1,183 12,848 Corporate Strategies Although motives vary among individual companies, recent surveys showed that concern about future markets was the primary reason for investing over- seas. In the past, Japanese companies had shifted the production of resource, labor, energy, or pollution- intensive processes to developing countries. The newer investments, however, have mainly come from higher technology industries such as automobiles, color tele- visions, video tape recorders, video disks, plain paper copiers, facsimile machines, personal computers, and word processors.- Although labor cost remains a fac- tor, it is not sufficient by itself to lead a company to move production overseas. Japan's auto industry is a clear example of the trend toward overseas investment to assure market access (see inset page 5). With the domestic market for automobiles nearing saturation and shipments abroad being limited by restraint agreements, Japanese auto- makers began to expand their assembly operations to the United States and other developed countries. In the early 1970s many had already set up manufactur- ing plants in Southeast Asia because of local content requirements and other restrictions on exports. Japanese manufacturers are usually reluctant to in- 25X1 vest in overseas production facilities if they doubt that profits or quality control can be maintained. For example, despite being wooed by the British Govern- ment, Nissan has been reluctant to set up an assembly plant in Britain for fear that Parliament might pass pending local content legislation requiring up to 80 percent of locally made parts in vehicles, according to a leading economic journal. Nissan also reportedly is concerned that the vehicles produced at such a plant may still be considered a foreign import by other EC countries and thus subject to high tariff and duties if exported to other European countries. Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Figure 2 Japan: Growth of Overseas Investment, 1951-81 r- I ~ I I I I I I I I I I I iii 1951-64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 Annual Average Honda Motors, one example of a Japanese manufac- turer expanding quickly into the global market, has established a network of offshore production facilities operating in 30 countries, including its new auto plant in Ohio. Honda was able to move rapidly into offshore auto assembling because it had earlier established an offshore base to produce and market motorcycles. In many cases, it was able to add to existing facilities to produce cars. Honda now has 43 offshore plants, produces automobiles in six countries, motorcycles in 24 countries, and parts in five countries. It also has licensing arrangements with local companies in the United Kingdom to produce cars and in France and China to produce motorcycles. The overseas ventures account for 20 percent of Honda's current profits. A number of leading Japanese companies have al- ready begun to form joint ventures with US or West European firms to develop and produce advanced- technology products. Sumitomo, for example, plans to open a plant in the United States to manufacture fiber-optic cables in a joint venture with Corning Glass. Other joint ventures currently operating or in IN 1951-64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 Annual Average a Approvals. the planning stages include such products as carbon fibers, oil drilling equipment, nuclear generating and radiological equipment, jet engines and planes, and LNG tankers. Such newly industrializing countries as South Korea, Hong Kong, and Taiwan are now requesting foreign investments in knowledge-intensive industries. Fanuc, the leading Japanese robot maker, recently formed a joint venture with the Kolon Group in South Korea to assemble industrial robots in that country in 1983. Similarly, Matsushita Electric recently announced plans to assemble industrial robots in Singapore, and Mabuchi has established wholly owned subsidiaries in Hong Kong and a joint venture in Taiwan to manu- facture minimotors for overseas sales. Once Japanese manufacturers make a major invest- ment to produce offshore, they often seek to attract their equipment suppliers in the home market to 25X1 25X1 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84S00553R000200170002-8 Secret Nissan is involved in auto and truck production facilities in eight countries-the United States, Mexi- co, Peru, Australia, Spain, Italy, Thailand, and the Philippines. In 15 other countries, Nissan's cars are assembled under license. Nissan now owns 55 percent of Motor Iberica S. A., Spain's leading manufacturer of commercial and farm vehicles. With a total work force of 8,000, the company will soon begin to assemble four-wheel drive and other vehicles for domestic and export sales. Nissan hopes to satisfy demand in Spain and to gain access to the lucrative EC auto market. Spain is scheduled to join the EC later this decade. Spain currently does not permit any .imports of Japanese motor vehicles. the parts for Australian-made Nissan automobiles are mandated by law to be procured from local parts manufacturers. The amount drops to 70 percent if the cars are to be exported. In Peru, Nissan holds a 56 percent share in a joint venture, Nissan Motor del Peru S. A., which pro- duces 1,000 cars a month and employs 700 workers. Nissan has been the top auto seller in Peru since 1978. In the Philippines, Nissan and Marubeni Cor- poration each had to take a 15 percent share in Pilipinas Nissan, Incorporated (PNI) with the rest owned by a government-licensed local partner in order to obtain manufacturing rights in that country. The Philippine Government prohibits passenger car In Italy, which imports only 2,000 Japanese cars per year, Nissan has established a 50-50 joint venture with Alfa Romeo to produce small-sized passenger cars starting this year, again with an eye to the broader European market. In Australia, Nissan's assembly plant supplies the domestic market with finished automobiles but eventually may export to the entire Oceania region. More than 85 percent of follow. Apparently concerned about the quality and availability of automobile parts, for instance, Nissan convinced some of its parts suppliers, such as Bridge- stone Tire, to set up plants in Tennessee. In ASEAN countries, Japanese automakers have brought in some of their component suppliers in response to local content requirements.' Major trading houses also have played a major role in increasing Japan's overseas manufacturing presence, accounting for more than 40 percent of overseas investments in the 1960s and early 1970s. Manufac- turing investments by major trading houses tend to be mainly in the areas of textiles, chemicals, iron, and steel. The trading houses also have played a role in production by nonlicensed companies. The most recent addition to Nissan's overseas pro- duction base is a truck plant in Smyrna, Tennessee. Nissan's investment of $660 million in the project is the largest manufacturing investment ever made in the United States by a Japanese company large-scale resource and energy-related industrial projects. In the 1980s the trading companies have continued to focus on investments associated with the relocation of Japan's basic industries such as alumi- num smelting, petrochemicals, and pulp and paper as well as energy-related industries. Such investments usually involve much greater risks than small-scale manufacturing facilities. Japanese trading companies are more willing than other Japanese firms to take these risks because of their vast network of trading offices and commercial intelligence. For example, Mitsui has established a soft drink bottle factory in Nigeria, even though the main raw material-caustic soda-is expensive and difficult to transport. Mitsui found a source in Kenya and pioneered shipments of the commodity from Kenya to Nigeria around the 2 The Association of Southeast Asian Nations comprise Thailand, Cape. Indonesia, the Philippines, Malaysia, and Singapore.) 25X1 25X1 2FX1 25X1 2~DAI Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84S00553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Table 2 Top 20 Japanese Firms in Overseas Investment as of March 1982 Ranking Name of Firms Outstanding Balance of Investment a 1 Mitsui and Company 922.9 2 Mitsubishi Corporation 879.5 3 Iran Chemical Development 792.0 4 C. Itoh and Company 518.5 5 Nissan Motor 441.8 6 Marubeni Corporation 439.0 7 Sumitomo Corporation 390.0 8 Sanko Steamship 318.5 9 Nippon Asahan Aluminum 312.4 10 Matsushita Electric Industry 303.6 11 Toshiba Corporation 290.8 12 Japan Leasing 283.5 13 Kawasaki Steel 266.3 14 Honda Motor 258.6 15 Toyo Menka 237.3 16 Sony 222.9 17 Nissho Iwai Corporation 221.3 18 Kawasaki Heavy Industries 217.3 19 Toray Industries 215.7 20 Fujitsu 205.6 a Calculated based on the 1982 average exchange rate of 249 yen to the dollar. Figures are based on company reports of overseas investments and not official data. In recent years, five trading firms led by Mitsui began to invest heavily in US agriculture, purchasing grain elevators and other facilities in the Gulf coast, west coast, and Great Plains states to ensure Japan a steady and cheap supply of soybeans, feedgrain, wheat, and other grains. Moreover, grain storage in the United States is less expensive than in Japan, and the companies also were interested in exporting grain to third countries. The trading companies, however, have suffered substantial losses from this venture because of slumping prices in the United States Another recent trend has been the willingness of small- and medium-sized Japanese businesses to in- vest overseas. According to the Ministry of Interna- tional Trade and Industry (MITI), the pace of such investments began to pick up in the late 1970s. Over the three-year period, 1978-80, small- and medium- sized firms made up 51 percent of the total number of new overseas investments. The percentage in 1976 was only 33 percent. In 1981 small- and medium- sized businesses accounted for two-thirds of the in- vestments in North America. Most of the overseas investments by smaller firms are in trade and service activities. Only about a fourth are in manufacturing, mainly electrical machinery and foodstuffs, but the pace of new manufacturing invest- ments is increasing. This could reflect the slowdown in the rate of growth in Japan's domestic economy, which may be pushing these enterprises to seek business opportunities overseas. In addition, Japan's large firms have increasingly urged smaller companies to follow overseas as subcontractors. Japanese small- and medium-sized enterprises for- merly aimed their overseas manufacturing invest- ments primarily at developing countries in order to take advantage of lower overseas labor costs, usually in labor-intensive light industries. Some were tied to investments of Japan's large trading houses. Recently, however, smaller companies have been investing in production facilities in advanced countries. These outlays are higher on the technology scale and are less likely to be tied to trading company operations. Some firms are manufacturers of software and hardware, others use computer technologies to churn out prod- ucts such as component parts for Japanese automobile or electronic appliance makers, or develop new prod- ucts including lasers, plastics, and special machinery for domestic and overseas marketing. 25X1 25X1 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553ROO0200170002-8 Secret Japanese Direct Investments in the United States As a share of total Japanese outlays, investments in the United States have been accelerating and now account for 26 percent of Japan's total global direct investments. The cumulative total reached $13.9 bil- lion in FY 1982. Indonesia is second on the list with 15 percent. Since 1979 Japan's investments in the United States have doubled and continue to rise rapidly, according to the US Department of Com- merce. Japan accounted for 8 percent of foreign direct investment in the United States in 1981, up 2 percent over 1980. The share in 1973 was only 1 percent. F-1 A recent survey by the Japanese Government-funded Japan Economic Research Institute disclosed that manufacturing investments accounted for only 18 percent of all Japanese direct investment cases in the United States. In contrast, 57 percent of the invest- ments were in commerce such as sales and trading offices. However, more than a third of the manufac- turing investment cases had entered the United States since January 1980 and almost two-thirds since the late 1970s. Recent investments have included electri- cal machinery (especially color TVs and home appli- ances), electronics equipment, communications equip- ment, semiconductors, machine tools, motorcycles, pharmaceuticals, foodstuffs, chemicals, iron and steel, nonferrous metals, and, most recently, automobiles. Japanese TV makers are setting up plants or using existing plants to make video tape recorders and video disks. Much of the recent flurry of Japanese investment activity in the United States has been in high- technology products where demand has soared so rapidly that it cannot be met solely by Japanese exports. Many investments, such as those in semicon- ductor manufacturing, reflect corporate desire to avoid future trade frictions by using local production. Cost savings and fierce competition in the industry have also influenced investment decisions, according to official surveys. In 1981, for example, four leading manufacturers of semiconductors-NEC, Hitachi, Toshiba, and Fu- jitsu-all began production in the United States. NEC also plans to open a new large-scale semicon- ductor factory in California, which will eventually Table 3 Japan: Direct Investment in the United States a Year b Total Overseas Investment (Million US $) Investment in the United States (Million US $) US Share of Total Investment (Percent) 1970 904 94 10.4 1971 858 216 25.2 1972 2,338 356 15.2 1973 3,494 801 22.9 1974 2,395 498 20.8 1975 3,280 846 25.8 1976 3,462 663 19.2 1977 2,806 686 24.4 1978 4,598 1,283 27.9 1979 4,995 1,345 26.9 1980 4,693 1,484 31.6 1981 8,906 2,329 26.2 1982 7,703 2,709 35.2 a Approvals. b Fiscal year. employ 600 workers. It is also opening a factory near Boston to manufacture office computers. Kyocera operates four production facilities in the United States to produce ceramic packaging for integrated circuits and other electronic parts. The main plant in San Diego employs over 1,200 workers. Although some investments through company takeover or joint venture are made in order to obtain advanced technol- ogy, most appear to be in products where Japanese technology is equal or superior to US competitors. The current investment boom, part.of a general world trend to invest in the United States, was set off in the late 1970s during a period when the dollar was weak against most foreign currencies, making imports more expensive in the United States. Since 1978, according to the US Department of Commerce, the United States has received more investment funds-particu- larly from Japan and the EC-than at any time since Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553ROO0200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 the 19th-century railway boom. For many foreign firms, it became more profitable to produce locally or to buy up local firms than to export to the United States. Other investors were attracted to the United States because of the availability of cheaper raw materials. As many as 14 plastic product companies, for example, began production in the United States because of low-priced US petroleum feedstocks. A number of Japanese firms bought sawmills and paper plants to take advantage of the low cost of local raw materials. One noteworthy aspect of Japanese direct manufac- turing investments in the United States is that Japa- nese firms, according to official and private surveys, prefer to establish new plants rather than buy out existing production facilities. By building new facili- ties the companies have created more jobs in the local areas. Japanese manufacturing affiliates in the Unit- ed States also tend not to be joint ventures, but wholly owned subsidiaries. European corporations have usu- ally bought out existing US companies. Historically, most Japanese manufacturing invest- ment in the United States has been small scale, employing less than 300 persons per production facili- ty. About 60,000 persons are now employed at Japa- nese plants in the United States. The average size of investments has been increasing, however. Large-scale auto, truck, and other assembly plants now in opera- tion should push the average employment up signifi- cantly since such plants employ between 1,000 and 3,000 workers. Manufacturing Investments in Western Europe Japanese direct investments in Western Europe to- taled $6.2 billion in FY 1982. The bulk has gone to the United Kingdom, which is the fifth-largest recipi- ent of Japan's direct investments, holding $2.1 billion as of FY 1981. Roughly 20 percent of the total Japanese outlays in Western Europe is in manufactur- ing. Japanese direct investments in Western Europe lag far behind those in the United States mainly because Japanese firms have found the investment climate less welcome. Recently, however, many European coun- tries have begun to court Japanese firms. New invest- ments were up 38 percent-about $800 million-in FY 1981. Nonetheless, some countries-particularly France, Greece, and Italy-remain basically hostile toward Japanese companies despite some recent joint ventures in high-technology products Japanese firms have ignored positive incentives, how- ever, in some countries. In the case of Northern Ireland, Ulster officials have tried to woo Japanese firms by promising assistance, touting the benefits of low labor costs and highlighting the education level of the labor force. Japanese firms, fearing terrorist activity, have not responded enthusiastically. They have not been afraid, however, to set up plants in the Republic of Ireland, which they view as safer. Western Europe has a long tradition of limiting Japanese exports through tariffs, voluntary restraints, harassment, and local content requirements. Japanese products subjected to such discrimination include textiles, electrical equipment, automobiles, motorcy- cles, china, cutlery, bearings, color televisions,, and quartz watches. Much of the planned or current manufacturing investments are joint ventures by pro- ducers of these goods with local partners designed to get around trade barriers. ASEAN: Changing Pattern of Japanese Investments Japanese academics who have studied long-term in- vestment trends conclude that Japanese businessmen have long regarded ASEAN as relatively safe for investment capital, although Thailand, because of its precarious geopolitical position, and the Philippines, because of its economic woes, are considered higher risks than the other ASEAN countries. According to surveys of Japanese businesses, the most common reasons why Japanese investors favored ASEAN were market expansion for their products, cheap labor, and government policies in ASEAN countries designed to Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Secret Table 4 Japan: Investment in the Manufacturing Sector of ASEAN Countries Million US $ (except as noted) ASEAN's Share of Japan's Global Investments End of End of End of End of CY 1976 CY 1980 CY 1976 CY 1980 End of CY 1976 End of CY 1980 Foodstuffs 85 118 (3.7 percent) 314 587 (4.7 percent) 27.1 20.1 Textiles 454 608 (19.0 percent) 1,128 1,637 (13.0 percent) 40.2 37.1 Lumber/pulp 98 125 (3.9 percent) 578 758 (6.0 percent) 17.0 16.5 Chemicals 109 417 (13.0 percent) 1,044 2,626 (20.9 percent) 10.4 15.9 Iron/nonferrous metals 182 913 (28.5 percent) 953 2,619 (20.8 percent) 19.1 34.9 General machinery 49 163 (5.1 percent) 452 894 (7.1 percent) 10.8 18.2 Electrical machinery 91 243 (7.6 percent) 687 1,579 (12.6 percent) 13.2 15.4 Transport machinery 118 239 (7.5 percent) 453 979 (7.8 percent) 26.0 24.4 Other 185 371 (11.6 percent) 460 894 (7.1 percent) 40.2 41.5 Total 1,372 3,198 (100.0) 6,065 12,573 (100.0) 22.6 25.4 attract new foreign investments. Other reasons includ- ed local restrictions on imports of certain finished products, such as automobiles, or to compete with other Japanese companies in ASEAN. Japan's cumulative direct investments in ASEAN reached nearly $10 billion in early 1982. About 70 percent of that is concentrated in Indonesia, mainly in several large-scale resource development projects. Japan is Indonesia's largest foreign investor, supplying more than 37 percent. Based on preliminary reports for 1982, this share is edging higher; 40 percent of new foreign investments approved by the Indonesian Government last year were Japanese. For the region as a whole, however, the pace of Japanese outlays has slowed somewhat, in part be- cause Japanese firms are less involved in labor- intensive industries such as textiles (see table 4). Most new investments in the manufacturing sector have been into more advanced industries such as electrical machinery and machinery (Singapore) and into heavy industries such as metals fabrication (Indonesia). Japanese investors in ASEAN usually set up a joint venture with local partners and are minority share- holders, reflecting in part host-country restrictions on equity participation. In the past, Japanese investors 25X1 have also favored group investments, often involving a Japanese trading company, to share the risk. Invest- ments in newer types of industries, however, usually do not involve trading houses, probably reflecting the trading firms' limited knowledge of high-technology sectors. Profitability of Overseas Investments Japanese firms have generally found overseas invest- 25X1 ments to be profitable: ? According to a MITI survey in 1981, 70 percent of overseas affiliates were making profits and revenues from overseas enterprises accounted for 5.4 percent of current profits of the parent companies. Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 ? The Ministry of Finance reports that the net return on direct investments received by Japanese compa- nies in FY 1982 reached a record $1.45 billion, despite the world recession. ? Automobile and electronic companies have led the list of industries with good earnings in recent years. For example, Nissan's overseas subsidiaries in West Germany, Mexico, Canada, and Peru have recently begun paying dividends to the parent company; its nonmanufacturing subsidiary in the United States has been paying dividends for years. Matsushita Electric last year announced a 15-percent increase in its dividend revenues from abroad based on fiscal year 1981 performance. These rising revenues from abroad also are shifting Japan's international balance-of-payment position. Repatriated profits helped trim Japan's traditionally large deficit on the service account from 13.6 billion to 9.9 billion in 1982. In certain months of 1982, remittances from abroad in the form of dividends accounted for more than half of Japan's current account surplus. The Japanese Government has played an active role both publicly and behind the scenes in encouraging investment. In the 1960s and 1970s Tokyo fostered outlays in resource development to ensure access to raw materials and in manufacturing in low-wage countries to help Japanese companies maintain their international competitiveness. Recently, however, the emphasis has switched to encouraging manufacturing investments in advanced countries to counter rising criticism of Japan's trade policies and to cope with protectionist measures (see figure 3). The government is encouraging foreign direct investment inside Japan for similar reasons. Under the foreign exchange control system, overseas direct investment by Japanese companies is unre- stricted except in fishing, banking, securities, leather, Figure 3 Japan: Overseas Investment in Manufacturing and Resource Development Resource development aThe large jump in resource development in 1981 is the result of a one-time, large-scale LNG project in Indonesia, worth almost S 2 billion. textiles, weapons, and narcotics industries. In restrict- ed sectors, specific approval from Tokyo is required. The procedure in other areas has been greatly simpli- fied over the past few years; now Tokyo requires only prior notice to the Finance Ministry with a 20-day waiting period. Tokyo uses a number of programs, incentives, and measures to encourage overseas investment. MITI provides risk insurance against losses caused by nationalization, war, or internal uprising in host countries. In 1980 MITI's insurance underwrote about 10 percent of the total value of direct invest- ments overseas. This small number reflects the ten- dency of Japanese businesses to choose investments in stable countries where such insurance would not be necessary. Some companies, however, have found the insurance handy. Bridgestone Tire Company had its Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Secret $12.9 million investment in Iran nationalized in late 1979. Unable to recover its right to manage the plant or its investment, Bridgestone finally decided to pull out of Iran in August 1982 and filed an insurance claim with MITI. Mitsui wanted to pull out of its petrochemical project in Iran after it was halted by the Iran-Iraq war, but MITI discouraged disinvest- ment because of the enormous amount of risk insur- ance it would have to pay. More investors may turn to this fund because of mounting concern over defaults and unstable condi- tions in many LDCs. The Japanese press also reports that some businessmen want MITI to expand its risk insurance program. To help cope with this problem, the Ministry of Finance has also created a new office to examine host-country financial risks and make its findings available to financial institutions. Official financial institutions provide only a small amount of the cash needed by Japanese investors for overseas ventures. In 1979, for example, about 10 percent of overseas investments were funded by loans from official financial institutions, a decline from the 29.5-percent peak reached in 1975. Over half came from parent companies' own resources, while less than a fourth relied on loans from commer- cial establishments. Government institutions, nonetheless, have the ability to aim their limited funds at selected countries or types of investments, which are of immediate policy interest to the Japanese Government. The Japan Export-Import Bank, which takes its guidance from the Ministry of Finance, has been charged with implementing the government's policy to ease trade frictions with advanced countries through industrial cooperation. The Bank's specific role is to provide financial assistance and extensive consultative serv- ices for Japanese firms planning manufacturing in- vestments in Western Europe or the United States. Almost a fourth of the Bank's total lending authority for FY 1983 has been earmarked for this purpose- about triple the authorized level in the FY 1982 budget. The most visible example of the Bank's new role is its backing of Nissan's new truck plant in Tennessee, where it will finance 60 percent of the $500 million Nissan needs. The remaining 40 percent will come from a nine-bank consortium. The government established an overseas investment system in 1981 to help small- and medium-sized firms invest overseas. The program, administered by the quasi-official Japan Small Business Corporation, pro- vides technical information and advice on joint ven- tures, contracts, licensing operations, and selection of business partners. It also advises businesses on plant and office construction, employment practices, and financial practices in host countries. Surveys evaluat- 25X1 ing country risks and prospective partners are also conducted. Often working closely with MITI and other govern- ment agencies, private economic organizations in Ja- pan such as the Keidanren or Keizaidoyukai, whose memberships include Japan's most powerful corpora- tions, actively promote overseas investment among their member firms. The Keizaidoyukai, for example, 25X1 has set up special facilities to promote investment in ASEAN. The Keidanren organizes and leads invest- ment missions abroad. The organizations also offer a whole range of infor- mational services to prospective overseas investors, supplementing those offered by financial and govern- mental institutions. Keidanren has long had an Inter- national Investment and Technical Exchange Com- mittee and in 1982 established a special committee, 25X1 chaired by Sony board chairman Akio Morita, to act as a clearinghouse for foreign governments that re- quest direct investments by Japanese firms. In the past, foreign governments had to seek out firms directly. Thus far the increase in offshore production has not hurt Japan's domestic work force, primarily because there have been other industries to take up any employment slack and because parent companies con- tinue to manufacture and ship component supplies to overseas assembly plants. With the increased pace of such shifts to offshore production and the increase in unemployment, some in Japan are becoming increas- ingly concerned. Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Recently, MITI commissioned a study to look into the possibility of unemployment resulting from the rapid expansion of overseas manufacturing investment. The study, by a private research organization, concluded that the domestic impact would probably be neutral as long as foreign manufacturing facilities use compo- nents produced in Japan. Private industry and labor in Japan are not as optimistic. In a Ministry of Labor study in 1982, some corporate officials and labor unions cited the Nissan plant in Tennessee as an example of an investment that could lead to unem- ployment at the truck plant in Kyushu, which has produced almost solely for the US market. list as Japanese firms continue to seek links to US companies as well as guarantee access to the US market. For US firms, joint ventures with Japanese firms will be both a challenge and an opportunity. The US. company will have to decide how much technology to share with its partner. US firms now are more worried about the impact of sharing technology with a potential competitor. On the other hand, joint ventures could also give US firms access to Japanese technology and managerial expertise. Industry press, for example, suggests that GM will benefit in such a way from its joint venture with Toyota to produce cars in California. trends continue, Japan's overseas direct investments will reach $100 billion or about 10 percent of the world's total stock by 1990. labout $33 billion will be located in the United States, about half of that in the manufacturing sector. We believe these projections are reasonable. Faced with changing international economic conditions and the need to maintain access to overseas markets, Japanese export industries should continue to shift part of their production base offshore and Japanese manufacturers should lead the way in an attempt to ease trade frictions. We also believe the Japanese Government will continue to encourage manufactur- ing investments in advanced countries through finan- cial assistance and other incentive programs in an effort to deal with protectionist sentiment in those market countries. Japanese direct investments in the United States during the 1980s should remain strong. Reflecting both the fear of new trade barriers and the large stock of Japanese cars already in the United States, trans- port machinery manufacturers and their parts suppli- ers should continue to open new production lines and expand existing lines. In terms of numbers of invest- ments, however, the electronics industry and other Japanese high-technology industries could lead the Based on survey data, we believe Japanese firms will continue to favor the US Sunbelt states. Many of these states have made special efforts to attract Japanese manufacturing investments. Under the current capital-to-labor ratio, $1 billion in new Japanese investment in the United States would create 5,000 new jobs. This, however, probably sharp- ly understates the impact because the new investment is likely to be in the manufacturing sector, which is more labor intensive. Official Japanese surveys al- ready show that the average number of employees per overseas firm is increasing. Japan's direct investments in stable LDCs will contin- ue to emphasize basic materials industries such as steel, aluminum, and petrochemicals, but the pace of new investments should be slower than in the previous decade because of a glut of those products in the world market. We believe ASEAN will continue to be the primary beneficiary of Japan's direct investments in developing countries in the 1980s, including Ja- pan's declining smokestack industries such as petro- chemicals, paper and pulp, and aluminum. Finally, Japanese industrialists should continue to respond positively but cautiously to ASEAN requests for advanced technology through technology transfers, licensing, and the introduction of knowledge-intensive 25X1 25X1 25X1 25X1 25X1 25X1 25X1 25X1 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 ,ecrer industries. Japan has already agreed to establish technology transfer centers in each ASEAN capital to provide technical training based on what is mutually judged to be appropriate to the needs of the country. Japan's drive to secure stable sources of energy and other critical resources will slow in the 1980s because of slower domestic growth. Moreover, Tokyo is limit- ing the official financial backing for such projects. Nonetheless, Tokyo remains sensitive to Washington's interests in joint ventures and will not rule out involvement in coal, oil, or gas projects in the United States even though Japanese industry complains about high costs. Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8 Secret Secret Sanitized Copy Approved for Release 2011/02/07: CIA-RDP84SO0553R000200170002-8

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